Nope, not a lot…

Sole primary deal: €600m for IG non-financials

No one would have expected that! A pretty much ‘nothing’ session to just about close out an uncertain and at times difficult week. Primary saw just Vivendi (€600m) for IG non-financials and we are surprised more didn’t show up to get deals done given the lack of competing supply and relative stability around the markets.

Admittedly, there is a persistent air of uncertainty now, but deals have been getting done into it as evidenced by the €9bn+ of supply in non-financials this week. We think that this is a lost opportunity for borrowers. There is still demand for corporate bonds. The ECB is a big player in the market. Deals are still 3x or more oversubscribed and syndicate desks are not shy in coming forward to tighten up pricing by 10-20bp. Investors seem to be resigned to this annoying and frustrating market dynamic, whatever. But still we buy.

The notion of “risk-on, risk off” – and it was supposedly the latter at the start of yesterday’s session – is not usually relevant for the primary bond market. Unless, of course, the markets are dropping hard. Moderate off-days ought not impact sentiment as far as getting deals done are concerned. Hence our surprise at the lack of new issue activity yesterday.

So how much of it was a risk-off session? Stocks in Europe played out in a small range around +/-0.2% for most of the day – before ending up to 0.5% higher. Government bonds were slightly better bid, but ended mixed into the close. Oil was up a little. News flow was light, save for the latest Eurozone inflation report which reported the overall rate at 0.5% for October, while core was unchanged at 0.8%. The ECB governing council’s report on the economic outlook painted a bleak picture for the economy over the next few quarters and suggests tapering is off the agenda for a while. Now there’s potentially a little relief for duration risk if ever we saw it.

We believe it was not a particularly difficult day to manoeuvre for most, but we suppose the lull gave credit market participants time to digest the fairly heavy amount of supply this week albeit from just a few borrowers. We can though look forward to what promises to be a fairly heavy amount of activity to come given the number of mandates out there and roadshows being undertaken.

Difficult week for corporate bond markets

There has been no major sell-fest by investors while we have had over €9bn of non-financial corporate bond issuance. The iTraxx indices have edged wider (volatile with stocks and government yields) and corporate bond spreads have widened too. With the ECB still picking up close on €2bn of corporate bond debt per week as part of its QE programme, we should be sitting pretty even as government bonds come under some fire. But we haven’t been. Spreads have widened and there lies our so-called “concern” about where we sit right now.

As measured by the Markit iBoxx index, IG spreads are at B+135bp – the highest level for 4-months, 15bp off the 2016 tights but 19bp inside where we started the year. We had expected spreads to have got down to as low at B+100bp by year-end as measured by the iBoxx index, given that ECB QE programme.

The central bank has taken up some €42bn of corporate bond debt. For a market which is supposedly illiquid and where demand for corporate “safe-haven” risk is at high levels, that spreads are not tighter is poor showing. And it could offer some cause for concern. The ECB is due to stop its corporate QE programme next March (we think they won’t). So if their heavy lifting isn’t already eliciting materially tighter spreads, we might not push on much after next March.

With that likelihood for the manipulative hand of the ECB no longer being a help in terms of preventing any spread weakness, we’re going to be back to being on our own. The focus then will be on the relative merits of credit versus equity versus sovereigns while more specifically, how spread performance will play out on the back of credit fundamentals, macro risks and the potential for asset rotation. Fortunately, that’s all for another day.

Yellen nails a December hike to the mast

Read her lips: Rate rise coming next month

Fed Chair Janet Yellen effectively signalled to the markets that a rate hike is coming – in December. There was little surprise in it and the markets took that in their stride as equities rallied (on higher growth expectations) although Treasuries had bit of a sell-off. They saw weakness with the 2-year yield up through 1% again to 1.03% and the 10-year was up at 2.29% (+7bp).

In Europe, Bund yields went the other way with the 10-year yielding 0.28% (-2bp) and was the main mover to go lower in yield in the session. The equivalent maturity Gilt yield was a touch higher at 1.41% (+3bp), BTP yields rose to 2.09% (+6bp) and Bonos to 1.59% (+5bp). That all seems like a bid for “safe-haven” assets to us – and probably comes on the back of nerves around the ECB governing council’s report of continued economic weakness more than anything else.

The Bank of England reported that its corporate bond QE programme had gathered £3.07bn of IG debt since the lifting began less than two months ago. They’re well ahead of target as they seek to purchase up to £10bn of corporate debt over an 18-month period. The buying programme has actually allowed the sterling corporate bond market avoid much of the volatility that has impacted the sterling currency, UK equities and Gilts of late. Spreads were marked a little wider in sterling corporates in the session (Markit iBoxx) with the index up at G+158.25bp (+1.25bp).

Elsewhere, secondary corporate bond markets saw spread weakness again and the euro-denominated index moved almost 3bp wider. The cash market is feeling a little hot under the collar. These are levels last seen in mid-July. The cash index has widened by 9bp already this week – and there is a session to go! The high yield market also edged wider, the index left at B+440bp (+5bp) – some 16bp wider in this week so far. The iTraxx indices closed little changed, with Main at 79.5bp and X-Over at 342bp.

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Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.